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People with unsecured debt, such as personal loans, credit cards or overdrafts, often require help managing it and finding solutions that could help pay them off. Refinancing your debt into a mortgage, also known as debt consolidation, is a viable option to choose for many, but it does come with risks.
Combining all unsecured debts into one sounds like a saving grace, but it’s not always the right choice for everyone. Proper Advice is here with a full guide to help you decide whether refinancing your debt into your mortgage is the right move, covering how it works, the benefits and risks, how it affects credit scores and how debt consolidation mortgages could help you out in troubling times.
Refinancing debt into a mortgage means using your home’s value to move existing debts into your mortgage, either by remortgaging or releasing equity. The money raised is then used to pay off unsecured debts.
Unsecured debts include:
These are debts that are not tied to an asset, whereas a mortgage is classed as a secured debt. By refinancing unsecured debts into your mortgage, you’re effectively turning multiple repayments into one secured monthly payment. Learn more about secure vs unsecured debt here.
Organising multiple unsecured debts into one monthly mortgage payment requires several steps to work.
First, your existing mortgage lender or a new one will assess the value of your property, which sets the limit on how much you can borrow.
Next, your available equity is calculated. This is the difference between your property’s value and the remaining balance on your existing mortgage. For example, if your property’s value is £250,000 and your current mortgage has a remaining balance of £150,000, your equity is valued at £100,000.
Following this, you will then apply for a new or increased mortgage that covers your existing mortgage balance and the debts you want to consolidate. The lender will assess your income, credit history and affordability, just like any standard mortgage application.
Once approved, the funds from the new mortgage are used to pay off your existing debts. In some cases, the lender will pay these directly; in others, the money is released to you to settle the balances.
The final step has your unsecured debt rolled into your mortgage. This means you now have a single monthly payment, the interest rate is often lower than unsecured borrowing, and the debt is now spread over a much longer term.
Before proceeding, it’s worth using a debt consolidation calculator to understand the true cost over the full mortgage term and compare it against your current payments.
So, why do people choose to refinance their debt into their mortgage? One of the main reasons is that it simplifies managing all your debts. You won’t have to contact multiple lenders, juggle different accounts or worry about several due dates. Instead, all debts are rolled into one simple monthly payment.
Another benefit of refinancing debt into a mortgage is that you’ll be consolidating high-interest unsecured debt into a low-interest secured one. Mortgages often come with lower interest rates than debt, like credit cards, and you could get an advantageous offer if you have a positive credit score.
As all your unsecured debt is rolled into one payment, and because it is now spread over a longer term, your overall monthly payments can be reduced, improving your short-term cash flow. Plus, with fixed rates and payment terms, you’ll gain stability and can improve your credit score.
While refinancing your debt into your mortgage can provide benefits for some, it’s very important to consider the risk.
While you might have a lower overall monthly payment, the term length is longer which means you will often end up paying more interest over time. Refinancing debt into your mortgage also usually comes with setup fees or charges from your existing lender. If you haven’t got immediate funds for this, you may not get an offer at all.
Perhaps the biggest risk is that your debt is now secured against your home, so if you miss payments, not only will your credit score be negatively affected, you could also face repossession or eviction.
Also, some lenders won’t offer a new loan that covers all your unsecured debts, meaning you’ll be left with the new consolidated loan plus existing unsecured payments that couldn’t be rolled into your mortgage.
It’s good to understand the difference in interest rates in more detail. Mortgages typically have much lower interest rates compared to credit cards, personal loans or overdrafts. For example, while a mortgage rate might sit around 4-6%, unsecured debt can often exceed 20%.
At first glance, this makes refinancing your debt into your mortgage seem like an obvious win, but it’s not always that simple.
A lower monthly payment does not automatically mean you’ll pay less overall. Mortgages are repaid over much longer terms, often up to 30 years. By spreading your debt over a longer period, you may reduce your monthly outgoings, but you could end up paying significantly more in total interest over time.
That’s why it’s crucial to look beyond the monthly cost and focus on the total repayment amount. Before making a decision, calculate:
Remember, there are benefits and risks, and your credit score can be affected in several ways.
Short term – your credit score might dip slightly due to lender credit checks during the application process, which is normal and usually temporary.
Medium term – clearing high-interest debts can improve your credit score, as fewer outstanding balances often reflect positively on your credit profile.
Long term – you could fall back into debt after consolidation. If you clear your credit cards but then start using them again, you could end up with both mortgage debt and new unsecured debt.
There’s also a loss of flexibility to consider. Unsecured debts can sometimes be repaid more quickly or adjusted more easily. Once rolled into your mortgage, that debt becomes tied to your home and is much less flexible.
If you are considering consolidation, you should avoid these mistakes:
Not calculating the total cost – focusing only on lower monthly payments can be misleading, so always compare the full repayment cost over time.
Continuing to borrow after consolidating – clearing your debts is only half the battle. Without a change in spending habits, it’s easy to build up debt again.
Ignoring fees and charges – refinancing may involve arrangement fees, valuation costs, legal fees or early repayment charges, which can add up and reduce the overall benefit.
Releasing too much equity – borrowing more than necessary against your home increases your overall debt and risk, especially if property values fall.
Not seeking professional advice – mortgage refinancing isn’t one size fits all. Speaking to a qualified advisor can help you understand whether it’s the right move for your situation.
Choosing unsuitable mortgage terms – opting for the longest term or lowest monthly payment without considering long-term impact can cost you more in the end.
Refinancing debt into a mortgage isn’t a decision to take lightly. It requires careful planning and support. At Proper Advice, we support those looking to proceed with debt consolidation, offering expert, qualified advice and saving you time and hassle by handling all correspondence and paperwork. Get in touch today to discuss your financial situation.
Think carefully before securing other debts against your home. The overall cost of repayment of other debts might be more when added to your mortgage. Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage.
